Activity Take Practice Alternative Financing Plans Question

Activity Take: Practice! Alternative Financing Plans Question 1 1 pt Alternative Financing Plans Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 10% bonds (at face value) Issue preferred $1 stock, $10 par Issue common stock, $5 par $1,000,000 $500,000 830,000 ,000,000670,000 Income tax is estimated at 40% of income. Determine the earnings per share on common stock, assuming that income before bond interest and income tax is $300,000 Enter answers in dollars and cents, rounding to the nearest cent. Plan 1 Plan 2 $. 0.18 X Earnings per share on common stock $0.16 X Earnings per share on common stock Incorrect Set up a column for each plan. Remember to take interest, income tax and dividends into consideration.

Solution

Plan 1 Plan 2 Earnings before bond interest and income tax $300,000 $300,000 LESS: Bond interest ($10,00,000*10%) & ($500000*10%) $100,000 $50,000 Balance $200,000 $250,000 LESS: Income tax @ 40% $80,000 $100,000 Net income $120,000 $150,000 LESS: Dividends on preferred stock ($830000/10) $0 $83,000 Earnings available for common stock $120,000 $67,000 Number of common shares (10,00000/5) ($670000/$5) 200000 134000 Earnings per share on common stock $0.60 $0.50